High cost of loans favours big banks over small lenders

A KCB branch in Nairobi. The lender is among top banks that made a total of Sh70.6 billion in 2012. FILE

By George NgigiPosted
Wednesday, April 10
2013 at
18:30

In Summary

KCB, Equity, Barclays, Standard Chartered, Co-operative and CFC Stanbic made a total of Sh70.6 billion constituting 65.6 per cent of the industry’s 2012 pre-tax profit.

Analysts said their faster profit growth was mainly driven by wider interest margins that they enjoyed for most of last year.

Kenya’s six largest banks increased their share of profits to nearly two-thirds of the total earnings reported by the 43 lenders in the sector for the year 2012, exposing a widening gap between big and small players in the industry.

The six biggest lenders recorded an average of 27 per cent growth in profit compared to the industry growth of 20 per cent, further reflecting the en-even growth which is tilted in favour of the large banks.

Analysts said their faster profit growth was mainly driven by wider interest margins that they enjoyed for most of last year when interest rates had touched a high of 25 per cent, as their big branch network and recognizable brands attracted cheaper customer deposits.

“Large banks have capacity to lend amounts that the smaller players cannot, their profit margins were also higher last year than in previous years,” said Vimal Parmar, head of research at Burbidge Capital.

The small amd mid-sized banks’ profit margins are narrowed by demand for higher deposit rates from their key customers.

Data from the Central Bank of Kenya shows that in June last year large banks were enjoying average interest spreads of 15.91 percentage points compared to small banks’ 11.62 per cent. Interest rate spread is the difference between what a bank pays its customers for deposits and what it charges the borrowers of loans.

The six banks hold half of the Sh1.76 trillion customer industry deposits. However this was a drop from 53.5 per cent held by the large banks in 2011, underlining the shift of deposits to the smaller banks which were paying higher returns for cash saved with them.

In a bid to retain the customer deposits, some of the banks raised the rate of returns paid to their big clients, which saw them report drop in profit margins.

Based on Kenyan operations alone, Equity Bank was the most profitable with a pre-tax return of Sh16 billion followed by KCB with Sh15.7 billion.The huge profits reported by the industry have usually been a source of disquiet in the country as the lenders were accused of exploiting their customers.

Large banks have been the major beneficiaries of the various measures put in place by the Central Bank of Kenya to help lenders cut their operating costs in the hope that these will result in them reducing their lending rates.

Introduction of the cheque truncation system, which involves the electronic transfer of cheque images rather than transportation of the physical paper was to the joy of the large banks which were transporting the cheques from far-flung areas to the clearing house in Nairobi.